Now that Minister Stephen Conroy has played his hand regarding Telstra's separation, the hard part begins.

Brace yourself for the inevitable heated debate, Telstra foot-dragging, and possible legal challenges that may shape the eventual separation policy more than anything Conroy says at this point. But Conroy — and the rest of Labor — really could help things along by figuring out how to stay on-message.

In the week since the big announcement, Conroy has hit the media for intensive Q&A about the potential separation of Telstra, which he announced in no uncertain terms last week. But in the intervening time, the nature of his answers to one key question has changed significantly.

That question is a simple one: whether the government is forcing Telstra to separate or not.

Carrot or stick? Stephen Conroy needs to decide how much leeway he'll give Telstra in choosing the manner of its own dismemberment. (Seppuku image used with permission of Waiapo, public domain)

It seemed to have been answered in Conroy's initial press release, which said the legislation "will allow Telstra to voluntarily submit an enforceable undertaking to the ACCC to structurally separate... If Telstra chooses not to structurally separate, the legislation provides for the government to impose a strong functional separation framework on Telstra."

The terms of mandatory functional separation include the requirement that Telstra "conduct its network operations and wholesale functions at arm's length from the rest of Telstra; Telstra provides equivalent price and non-price terms to its retail business and non-Telstra wholesale customers; and this equivalence of treatment is made transparent to the regulator and competitors via strong internal governance structures".

In other words, the first release leaves no doubt that if Telstra doesn't voluntarily introduce structural separation, the government will pursue the same endgame via a mandatory functional separation. Doesn't sound too voluntary to me.

If you look at the online version, it's right there in black and white: "The government will require the functional separation of Telstra, unless it decides to voluntarily structurally separate."

Fast-forward to Conroy's interview with the ABC's Inside Business over the weekend (or any of a half-dozen other interviews over the last week), when Conroy was asked "what made you remove that choice [that Telstra could remain integrated if it passed on the NBN opportunity]?"

"We haven't removed the choice," Conroy answered. "We've given Telstra a choice... They can stay exactly as they are or they can choose to go down the path of the fibre future and into the exciting new mobile spectrum which will [be] becoming available in the next few years."

Conroy's original position was that Telstra had to separate or it would be separated ... now he's telling the media that Telstra has every right to stay the way it is right now.

By my reading, that's not at all what the original release said. Conroy's original position was that Telstra had to separate or it would be effectively separated by legislation. Now he's telling the media that Telstra has every right to stay the monolithic, non-competitive way it is right now.

So what has changed?
One could speculate about the reasons for Conroy's policy change 'til the cows come home, but one of the most immediate possibilities is that the tone and mandatory nature of his initial pronouncement has been flagged by The Lawyers.

Whose lawyers? Well, one assumes his own department's lawyers went over this policy with a fine-toothed comb before it was issued, so it presumably wouldn't be them suddenly warning him.

Could it be Telstra's lawyers, offering the minister the same gentle reminders about the complexity of government interference in private assets? Or, perhaps, lawyers representing Telstra's shareholders, who were none too happy about the announcement and may be fearing the short-term effects of Conroy's new policy?

Labor has certainly backed down from ambitious reforms before: by some accounts, after all, the entire FTTP NBN as now architected only came about after warnings that mandatory resumption of Telstra's end-mile network would carry a potentially massive punitive price tag. If similar questions were being raised about the policy as initially envisioned, it could certainly have motivated Conroy to repaint the proposed legislative changes in the current more-unctuous language.

Whereas Conroy was initially saying "split or be split", the message is now "please split if you know what's good for you". And what's good for Telstra, apparently, is this "exciting" new wireless spectrum — presumably the 700MHz digital dividend that will be freed when analog TV is shut off in 2013.

Conroy's threat to withhold wireless rights [is] about as effective as telling a 14-year-old that you will take away his car keys as punishment for trashing the living room.

But Telstra already seems more than happy to keep developing its Next-G wireless service; that makes Conroy's threat to withhold wireless rights about as effective as telling a 14-year-old that you will take away his car keys as punishment for trashing the living room.

One wonders whether the language will change even more as debate over the proposal reveals philosophical fractures amongst Conroy's own party. For example, Finance Minister Lindsay Tanner's statement that Telstra's government-OKed investment in Foxtel has been "dreadful" for competition got broad coverage, but Conroy's separation edict allows the minister the discretion to allow that investment to continue should Telstra voluntarily separate.

In other words, Telstra's continued vertical integration is seen as a much bigger threat to competition than its half-interest in Foxtel or its ownership of the fibre-coax network that carries Foxtel into around 1.5 million homes. The government can live with Telstra dominating pay TV if it just splits up its copper local loop monopoly.

Linking these issues to separation may be a bold attempt to force Telstra to choose the manner of its dismemberment. However, Telstra's long-established ability to capitalise upon inertia may well be a problem. If Telstra calls Conroy's bluff and cashes out of Foxtel — or passes on the opportunity for a "exciting new mobile spectrum" — the minister will be forced to act despite his attempts to reshape the new policy as a voluntary choice for Telstra.

And that, if the lawyers have indeed been warning of consequences for government-imposed separation — and if they prove right — could be very interesting indeed. Until then, Conroy needs to decide just how much flexibility Telstra has here, and stick to it.

What do you think? Is Conroy staying on message, or will he have to soften his stance to accomplish Labor's endgame?